Admittedly, if you're frustrated with the confusion of investing or the seemingly never ending parade of shady characters that seem to make up the financial services industry, then you could likely come up with quite a few choice "F" words. In this case, however, the "F" word is Fiduciary.
A fiduciary is someone who acts as a trustee, or in other words, a person to whom property or power is entrusted for the benefit of another. In the context of those who manage the investments of others, it is accepted that it means we act in the best interest of clients - always, and without exception.
The issue of investment advisors acting in a fiduciary capacity has recently been once again brought to the forefront. President Obama has recently put his efforts behind the movement to have one consistent standard for those who manage the investments of others. Perhaps, shockingly, you’ll realize that such a movement means that, currently, not all advisors are required to act in the best interests of their clients.
Regardless of your personal feelings towards the President, his political party or politicians in general, as an investor, one has to admit that any renewed focus on this issue is a major step in the right direction. Should new legislation come from these efforts it could be a major protection for investors, provided, of course, that any new legislation has the teeth to be effective. The new DOL rule is a start, but it's far from perfect and arguably doesn't quite deliver the necessary bite, in my opinion.
The Fiduciary and Suitability Standards in Practice
The issue of the fiduciary standard versus the much less stringent suitability standard is a complex one and perhaps an example is the best illustration of the differences.
Say that you seek out a specialist doctor for the treatment of a chronic, but non-life threatening ailment. The consensus is that there are three possible treatments; 1) medication, 2) physical therapy, or 3) surgery. Each treatment is equally effective at treating the pain. However, they differ in cost and speed of recovery, with option 1 being the least expensive and quickest acting, and option 3 being the most costly and requiring the longest recovery period.
You get two opinions, one from Doctor A and another from Doctor B. Doctor A recommends treatment 1 because it is less expensive and the quickest acting and therefore best for you. Doctor B, however, recommends treatment 3 - surgery. His logic for choosing the surgery option is that it is equally effective (i.e. suitable) as the other options, but provides him with the most revenue. Which option would YOU prefer?
In the above example, think of Doctor A as an Advisor (fiduciary standard) and Doctor B as a Broker (suitability standard). Outwardly both call themselves the same thing (Doctor), just and both Brokers and Registered Investment Advisors (RIA’s) go by the name Advisor. However, as you can see the course of treatment is not only more costly to the patient but fraught with conflicts of interest and other drawbacks.
In my opinion a single, stringent set of rules should apply to ALL money managers, ALWAYS. Of the two options, the fiduciary standard is much preferred to the less attractive suitability standard. Should legislation fail to move ahead with a single standard, a viable consolation may be to at least require brokers to identify themselves as such, rather than using the more ubiquitous term of Financial Advisor.
Ultimately the goal is to move the industry to a model of lower cost, greater transparency, fewer conflicts and always acting in the best interest in the client. While these are worthwhile goals, they are not new, and one should ask if they prefer to work with someone who is forced, kicking and screaming, into compliance or someone who chose to structure their advice to be the best from the jump.
For further reading on this topic see; The Effects of Conflicted Investment Advice on Retirement Savings, from the Office of the President of the United States, here: (http://www.whitehouse.gov/sites/default/files/docs/cea_coi_report_final.pdf)
Note that the recent DOL ruling, and the President's comments limit their scope to retirement accounts only. This problem is much greater than just retirement accounts and one must wonder if this is a concession to Wall Street to keep the money flowing in in the form of political contributions.